5 ways to make money in a falling housing market

Unlike the stock market, it’s not possible to short $200 dollars of prime Florida real estate. So if you’re convinced the current slump in real estate is going to become a prolonged crash, how can you make money from the falling market?

1. Sell your house and rent

Possibly the most straightforward method of making money in the housing market is not to be in it. If you’re certain that prices are going to fall, and are confident you can maintain the equity you release from the house by investing it wisely, then selling up and moving into rented accommodation can be a good move. If you time the market wrong, the combination of being off the ladder while prices rise and monthly rental payments can be tough to swallow. I can only see this as an option if your situation makes it possible. I wouldn’t like to move a family out of our house just to make a swift buck. Having a stable life has more advantages than the money saved on selling and renting could give.

2. Short the financiers

Sub prime mortgage specialists, such as “New Century Financial” have already felt the cold finger of default as the market stalls. Other banks and financiers are likely to follow, as difficulty in paying repayments moves up the pyramid of mortgage risk. Look for Alt-A heavy firms (such as American Home Mortgage Investment Corp.) to struggle next. The whole banking and financial sector will probably feel under the weather in the coming few years as defaults shake investor confidence. Shorting the financiers, or placing spread bets to take advantage of a fall, could pay off handsomely.

3. Short the agents

As the public increasingly becomes aware of the housing situation, it’s also likely that the number of buyers of properties will be markedly reduced. A reduction in buyers, and therefore sales could hit the realtors badly. This will be compounded by the large numbers of people obtaining their real estate license in the past few years. This means too many realtors chasing too little business. It’s looking gloomy out there.

4. Buy “distressed” properties

Distressed sellers can be desperate to get rid of their property before the bank forecloses on them. Whether you prefer to approach the owners directly, or snap up properties at auction, it won’t be long before there’s bargains to be found on the market. If you are confident of rental income covering all expenses on a property then it’s a good deal no matter what the market is doing. You may even be able to benefit from anyone forced to sell, and reduced to renting. This comes with a big but : don’t expect capital gains on any property, in fact, you may lose some of your capital in the short term. The ability to take a long term approach is key to this strategy. Buying distressed properties is more likely to pay off at the bottom of a crash, as mortgage repayments fall deeply below rental values. So you may want to bide your time on this one.

5. Spread bet on house prices

Spread betting on house prices has recently been announced by the firm igindex. Although it’s only available in for UK markets currently, it’s combination of leverage and ease of access could make it a winner in the event of market volatility. Spread betting is a method to leverage your returns (or losses) on investment, similar to using options. See here for a further explanation of the pros and cons.

Although the easy money in the real estate market may have dried up, there’s still plenty of scope to turn a profit. Looking at falling markets as an opportunity is a key skill for investors.


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